PROMPT CORRECTIVE ACTION (PCA)

Sept. 29, 2019

The Reserve Bank has initiated Prompt Corrective Action (PCA) against Lakshmi Vilas Bank (LVB) due to a high level of bad loans, lack of sufficient capital to manage risks, and negative return on assets for two consecutive years. The regulatory action may cast doubts over the proposed merger of Indiabulls Housing Finance with LVB, which is awaiting RBI nod.

About:

Meaning: PCA Framework are the corrective measures suggested by RBI that should be a taken by commercial banks when its financial condition worsens beyond a level.
Objective: To maintain sound financial health of commercial banks.
Parameters: Under it, RBI has specified trigger points in terms of three parameters:
1. Capital to risk weighted assets ratio (CRAR),
2. Net non-performing assets (NPA) and
3. Return on Assets (RoA).
Actions: If a bank hits the trigger point (like CRAR of 9%, 6%, 3%) then RBI initiates certain structured/mandatory and discretionary actions in respect of that bank.
- Structured actions are those which are essential to restore the financial health of banks.
- Discretionary actions are taken by RBI depending upon the profile of each bank.
- g. banks are restricted from certain riskier activities such as expanding the number of branches, increasing the size of their loan book and paying dividend.
Type of institutions covered: The PCA framework is applicable only to commercial banks. It is not applicable to –
1. Co-operative banks,
2. Non-Banking Financial Companies (NBFCs) and
3. Financial Management Institutions (FMIs).
Present status:
- Currently, 11 out of 21 Public-sector Banks are under the RBI’s PCA framework.
- These are Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India.